When I was a grocery manager, I was taught to focus on a single item’s penny profit or gross margin. The problem with this outdated strategy is that it overlooks what really matters: the customer. There’s a better, more effective way to drive profitable category sales in your store, and it begins with focusing on how your customers shop.
When I switched to the manufacturer side of the business, the same strategies were the hallmark of every category management overview. The customer journey has changed dramatically, and customers have seemingly endless choices in where to shop and spend their money. Shouldn’t your business strategies reflect this and be as innovative as we you are?
The best part of this strategy is that your competitors most likely follow the old methods. Depending on how well you adopt these strategies, you could gain a significant and sustainable competitive advantage.
Customizing the Shopper Experience
Time-starved shoppers don’t typically enter a store, buy a single item and leave — they pick up complementary items too. Those shoppers have a higher — larger — market basket at checkout and are far more valuable than those who purchase just one item. This includes the shoppers who buy only based on price.
In its most basic context, retail is about selling products that consumers want to buy and not pushing them to shop the competition. You grow in your market by taking share away from your competitors, including those online. By focusing on the shopper’s entire purchase, you can begin to customize your product offerings and how you merchandise your store.
For starters, everyone needs to be familiar with two important concepts: the first, share of wallet; the second, market basket. As previously stated, market basket includes what is in the customer’s shopping basket at checkout. We’ll come back to this.
Share of Wallet
“Share of wallet” refers to the amount of money a person has available to spend on all the items on their shopping list. For example, let’s say a shopper has $400 to spend each month. That includes all purchases everywhere they shop. The goal for each retailer is to get all those purchases made at their store and not inadvertently encourage the shopper to go to any of the competitors. This can happen for a variety of reasons: The shopper can’t find what they want, the price is lower elsewhere, etc. Each purchase from a competitor provides an opportunity for the other store to win the customer’s loyalty.
Finding Patterns in Product Contribution
Most brands and retailers focus on an item’s penny profit or margin, so think more strategically: Focus instead on an item’s contribution. This is measured by the dollars per point of sales distribution, which highlights how much a single item gives back to the category in the form of its contribution.
This is important because although mainstream items might have high total dollar sales in the category, their contribution is most likely really low compared with their natural organic counterpart products. In other words, their sales do little to aid competition in the market, and those items contribute less to a shopper’s market basket.
The reason: Natural organic shoppers will pay a premium to buy the products that best meet their needs. They are less price sensitive and usually extremely loyal. They are typically the best customers. The natural organic shoppers believe that if you are what you eat, then what you eat matters. They perceive organic products to be a much better value and are happy to trade up. This is why most retailers are adding natural organic products to their categories.
Focusing on every item’s contribution allows a pattern to emerge. Those natural organic items that have a higher contribution also have a much higher contribution across every category. Therefore, the health-focused shoppers do more to drive profitable sales across every category and overall store profits with their larger market basket.
A Pharmacy’s Secret Weapon
The best way to grow sustainable category sales is to have a wide selection of products that customers want to buy. Pharmacy owners should focus on the customer market basket and how these customers shop the store. This means offering a good selection of popular items found in your market in addition to unique items your competitors do not sell.
You already have a secret weapon that your competitors overlook: the brands that make these items. Tapping into this important resource will set you apart.
Retailers cannot be experts on every item they sell and the customers who buy their products, but your brand partners definitely should be. Challenge your brand partners to provide actionable insights that can help you here. Why settle for canned top-line reports — the same generic reports that most brands share with you but only with their unique spin on the data? Instead, request — and then act on — details about the customers who purchase their products over the competition’s. When their customer purchases their items, what else appears in their market basket?
That question might first strike your brand partners as a bit unusual because this information is not required during a traditional category overview or new item presentation. The bottom line is that your brands should know who their core customer is and how they shop their category. Leverage their insights to identify products you should carry and how your categories should be merchandised.
This likely means rethinking how you interact with the brands whose products you sell. Identify leading brands in every category that can help you. Do not focus only on the mainstream brands — that is exactly what your competitors do. Although insights from the leading brands can be very helpful, those from the natural organic brands offer a distinct competitive advantage. Choose the disruptive natural organic brands with the highest category contribution.
Effective Merchandising: More Than Meets the Eye
Traditional merchandising strategies typically place the top-selling items at eye level. This is a huge mistake and a missed opportunity. Instead, place premium and superpremium items at eye level to encourage shoppers to trade up. It’s also a good idea to help educate shoppers on the differences between the products so that they can make the best decision for themselves — another area in which your brand partner’s support can be invaluable.
The customer journey has changed. Shoppers now look beyond the four corners of the package to better understand what they are buying. They want transparency, eco-friendly packaging, a well-defined message and mission, and more. Find ways to help customers fill this need. One strategy is to leverage the content your brand partners already have. If you can help them sell more and grow, they will gladly help you compete more effectively.
The Market Basket
Start with the market basket and work backward. What does the customer journey look like? What is their decision process as they move through your store? Use this as a road map to better understand how your customers shop.
The next question you need to answer: Which items are your customers purchasing elsewhere? Talk to your customers and get to know them. If you can authentically help them find what they want, they will gladly help you identify the items they would like you to sell. Remember that no shopper wants to make multiple trips to different stores. They want convenience, and they want a fair price. Most shoppers will pay a few pennies more for convenience, so don’t get hung up on price.
Back to where we started: Little has changed in retail. Traditional strategies focus on collecting money and fees rather than driving growth and customer satisfaction. For a more competitive advantage, adopt forward-thinking strategies that put the shopper first.
Your goal should be to focus on your shopper’s share of wallet and increasing market basket. Making it easy for them to shop your store and offering a good selection of the products they want, along with outstanding customer service, will help you grow sales and compete more effectively.
About the Author
Dan Lohman, CPSC is a consumer package goods and natural industry strategic adviser. His company, Brand Secrets and Strategies, provides innovative ideas, actionable insights and strategic solutions to the challenges that brands and retailers face. His “Brand Secrets and Strategies” podcast is a popular natural products accelerator for food startups, healthy brands and retailers.